01/07/12

From Comment

Should The OECD Finally Be Dissolved?

Denis Kleinfeld goes straight for the heart in this stinging critique of the OECD and raises the question should the OECD finally be dissolved?

Pigs Have Sprouted Wings! Repu…

The Organisation of Cooperation and Development has been in existence since 1960. The beginning, remarkably enough, was the Marshall Plan where the United States bailed out a war torn Europe. From that beginning the OECD has grown into a supranational institution implementing policies that impact every economy around the globe.

The OECD's purpose was to pave the way “for a new era of cooperation….” that started with the US and Europe and now essentially encompasses as members or to-be members virtually all the dominant industrial powers.

Currently, the OECD is comprised of 40 countries representing 80 per cent of the world’s trade and investment. The United States and the EU alone represent currently over 50 per cent of the world's economy. Because of this shear economic power, policies proposed by the OECD have the dramatic effect of becoming the operating rules applicable on all nations and impacting the lives of all peoples.

The OECD describes itself as, "Providing high-quality policy advice, multi-disciplinary perspectives and peer-learning approaches, the OECD is a unique organisation which sets standards and defines best practices in almost every field of economic and social policy." Basically, it focuses on the well-being of all citizens with a commitment to democratic institutions and market economies. It also set out to "make life harder for terrorists, tax dodgers, crooked businessmen, and other who undermine a fair and open society."

Is this self-description accurate?

I am not of that view. The world community is dominated by dictators, depots, and thugs. The EU member countries are in utter turmoil economically, socially, religiously, and politically. The United States' economy only looks good because of the sorry state of every other economy.. Nearly all of the industrialised economies are not growing in prosperity, but are essentially if not already, bankrupt. China is going under, the African nations I make no comment on, the middle-east is on the edge of war, and Russia has almost ceased to be a functioning economy while becoming a Czarist state.

If the United States becomes energy independent--which it can easily become--- the price of oil can be expected to drop dramatically. If that happens, then conceivably the economies of the middle-east countries (excepting Israel which has a successful economy and currency), and Russia will collapse. The North African nations will certainly be in economic trouble, and some countries in South and Central America will potentially be plunged into civil war. I wonder if the OECD has statistics and a report on this eventuality.

Economic growth has disappeared and international financial stability is on, possibly, its death-bed. The free market is certainly not free of government market distortion, heavy-handed and counter-productive regulation, taxes and borrowing which funnel capital from the productive sectors of the private economy to the most unproductive governmental sectors, and ill-conceived attempts at social and economic engineering. Terrorists are growing industry world-wide, crooked businessmen steal less that the politicians, nothing in life is fair, and the idea that we are enjoying an open society is absurd. Is it fair to say that the OECD's standards and best practices do not comport with the facts on the ground?

Governments have abandoned their sovereignty by anointing the OECD as the ubernational tax, economic, social, environmental, and crime fighting international leader. It along with a host of other international institutions which taken together form a de facto government of the governments. Whoever sets best practices and policy for the OECD is setting policy for a good part of the rest of the world. My feeling is that the OECD is not my mother and as bureaucrats living on the high in Paris they do not know what is best for me.

Organisations are run by live people. If the people leading the organisation are successful, then the organisation may well be successful. If the leadership is bad then the organisation will always be bad. With that said the OECD takes pride that its primary core strength is diversity.

I take this to mean that in the view of the OECD hiring people because achieving they fit the right balance of races, creeds, colors, nationalities, sexual preferences, religions, height , weight, and an assortment of disabilities is preferable to just employing people on merit and the ability to perform the job. I guess that approach works if an organisation is supported by other organisations and people that actually depend on working for a living.

The OECD Secretary General, Deputy Secretaries, and heads of the Directorates are non-elected administrators and policy-makers, who live in Paris tax free (except for the Americans), travel first class, live first class, and whose every expense is paid for by the member states from taxes or money borrowed. These are the guys who tell everyone else to pay their fair share of taxes and share in making sacrifices for the greater good of all. This reminds me that we should never confuse the Hippocratic Oath with hypocrisy.

Can we have confidence that the OECD leadership has the knowledge, expertise, and experience to wisely lead the world through the uncertain and frightening times in which we now are living? Looking at their bios, it appears that most of them are academicians and governmentally trained policy wonks that apparently pride themselves on their devotion to a rigid collectivist philosophy supported by self-created intellectual elitism untainted and unhampered by any actual world experience. The rest are economists.

Whether formally stated or otherwise created through peer and economic pressure, the foundation of the OECD's power is that the member countries accept as an article of faith that the sovereignty of any nation has to be subordinated to the will of this international collective. Harmony of systems, standardisation of policies, transparency to bureaucrats, elimination of privacy, unity of thought on all matters, and the ability to force compliance on any unwilling country are its methodologies.

In a colourful sense, the OECD is (if you remember Star Trek) the Borg of organisations. Looking around the world today, I believe it can be concluded that the OECD approach to solving the world's problems has solved nothing but has created even greater, perhaps now nearly insurmountable difficulties.

I am not one to deny that economic growth has unquestionably taken place throughout the world over recent years. It is readily apparent that the economies and peoples of nearly all nations are, to a greater or lesser extent, much better off notwithstanding that no government generated data is overly reliable in quantifying how much. This appears to be the result of the power of free-market capitalism working its magic in spite of OECD mandated policies that focus on redistribution of capital from the productive to the unproductive.

I agree that the OECD has promoted policies across the globe and I agree that generally there has been economic growth but that does not prove the OECD is the underlying cause of prosperity. I do remember from one of my college philosophy or logic courses that coincidence is not proof of correlation, and correlation is not proof of causation.

The United States can be used to demonstrate the OECD's claimed success in accomplishing the stated goal of continuing "to build a stronger, cleaner, fairer world." As for being stronger, the United States is bankrupt. Its debt to GDP ratio is among the worst in the world and rapidly degenerating from there. Governmental spending which has been accelerating since the start of the 'Great Society’ under President Lyndon Johnston is dominated by mind boggling amounts of transfer payments for welfare schemes that grow at an exponential rate. Already within striking distance, wealth redistribution mandates will overwhelm the United States' combined ability to tax and borrow.

Unemployment numbers alone do not even scratch the surface in measuring the destruction to the social fabric within the US. Some 95 per cent of US exports used to be sold to the EU. The EU economy is now staring into the abyss, the Euro is a dead man walking, and exports from the US to the EU are on a downward trend. This adds to the economic woes of the US which is suffering with US factories, small and large businesses, and service providers of all types already burdened by the heavy hand of unyielding regulations (reflecting the best practices promoted by the OECD), downsizing, laying off workers, or closing their doors altogether. Worse yet, there are effectively no new businesses being created.

If but five million small businesses hired on a single new employee, this would create five million jobs in the private economic sector. The private sector is the foundation for creating productivity, Governments only create debts and taxes. It would fair to conclude that the policies of the OECD have resulted in more growth in economically unproductive government employment, and less (or no) growth of employment in the private sector which does create productivity.

The combination of unemployment and underemployment is rapidly becoming the new normal. Nothing the OECD has ever done or proposed has to date altered that trend. Clearly, just because of policy failures on the part of the OECD does not cause its leadership to vary its beliefs as to what drives productivity, flows of trade, investment, and the creation of jobs. Government intervention and control as to the solution for all problems, paid for by increasing tax rates on whoever is deemed ‘the rich’, is the hallmark of the OECD. The OECD policies do not promote prosperity, but an open free-market does.

Free marketers believe that a free market does not mean a free-for-all market. Government does serve a purpose in enabling the free market to work. The market forces, when free from heavy handed governmental regulation, taxation, and policy induced distortions are dramatically more effective and efficient in regulating economic behavior and creating productivity. It should be obvious, for instance, that in the United States governmental programs, regulations, and tax impositions are positive proof that governmental interference is decidedly unhelpful to a free market economy but are undoubtedly the dominant factors contributing to economic failure, social failure too.

The vital importance of tax policy should not be overlooked when critiquing the OECD. The primary and dominant vehicle used by the OECD to maintain its status as the government of all governments with all the accompanying power is the control and promotion of how tax should be levied.

Some 200 hundred years ago, Chief Justice of the United States John Marshall struck down a Maryland tax and stated succinctly an eternal truth, "The power to tax involves the power to destroy." The Constitution specifically prohibited a federal income tax as it did a central bank. The Founding Fathers (meaning the signers of the Constitution) well understood economics as well as tax history.

However, later politicians and special interest groups saw the adoption of an income tax system as a way to gain access to endless amounts of money, the Holy Grail to all politicians. Those in the United States who pushed for the tax system change from an effectively consumption and indirect tax system to a direct income tax system. Politicians and their supporters well knew that rates of tax could be manipulated because the setting of rates was purely a political decision.

The big political benefits are, of course, the ability to spendunlimited amounts of taxpayer's money to fund payoffs to campaign contributors or special interest voting blocs. Not only that, it becomes a truly efficient, legitimate and institutionalised system for Congress and the Administration to receive money which are not treated as bribes. Perhaps there is some unknown explanation why the OECD is so focused on getting rid of crooks in the private sector, but overlooks the same behavior in the public sector.

The OECD states "First and foremost, government needs to restore confidence in markets, institutions and companies to make them function”. That will require improved "regulation and effective governance at all levels..."As well as, "Secondly, governments must re-establish healthy public finances as a basis for future sustainable economic growth.".

The truth is that our political leadership, our governance, does not even know what is in the laws they enact. As Congresswoman Nancy Pelosi (D-San Francisco) when she was Speaker of the House of Representatives said on the passage of the 2700 page Obamacare law, "We'll have to pass it in order to know what's in it.". At the around the same time, as I recall, the House of Representatives under the leadership of Congressman Charles Rangel (D-Harlem) the Chairman of the House Ways and Means Committee (which dictates tax policy) had the House members voting on a tax law which had not yet be made available for anyone to read.

The United States amended the Constitution by adopting the Sixteenth Amendment in 1913 and with that, the income tax experiment began. The United States now has experienced 99 years of the income tax system. Consequently, reliable observations of its impact on the United States can, and should be made, particularly as it is the horse that the OECD uses to ride roughshod over everybody in its way.

In 1913 the tax reporting form was four pages long. Even then some member of Congress complained that it was entirely too complex. In 1921, Congress came close to repealing income tax and enacting in its place a national sales tax but the politicians just hated to give up that money.

Fast forward to 2012. To understand the current complexity of the US income system is beyond my ability to articulate other than by an example. It has been reported that the tax return filed by GM for 2011 was 67 feet high. Even the simplest of individual tax returns takes a number of pages of forms, computations, as well as answers to a bewildering array of questions. Complying with tax law requirements in the United States is definitely neither easy nor cheap. The same is becoming abundantly clear everywhere the income tax system is used as the funding mechanism for government activities.

The OECD promotes tax policies to create tax harmony, eliminate tax competition, and end tax abuse. To achieve this, the OECD has found that it becomes ever necessary to impose draconian and oppressive measures in order to make the income tax system work. Any idea of cooperative economic prosperity, encouragement of trans-national capital flows, international trade, or making global investing a seamless effort has been sacrificed on the altar of the income tax system.

The strategy theory appears to me that if government gets all financial information on everyone, everywhere, then they can grab all the crooks, excepting politicians, and all will be just sunshine and roses. The US government has already been at this strategy for a long time and it has never had even a glimmer of success in stemming the tide of any form of criminality.

Drugs are a bigger business than ever, trafficking in woman and children is bigger than ever, arms sales are bigger than ever, and the same ongoing failure can be said about every objective and initiative of the OECD. The OECD blames the offshore tax havens, as defined by the OECD, for all ills. It ignores the fact that these financial centers are merely conduits for the transfer of money from the OECD countries where all the crime takes place to the OECD countries where the money is invested. Why use an offshore tax haven company when a Delaware LLC will be much more effective? Besides the United States is actually the largest tax haven in the world.

Cross border government to government exchange of financial information on its respective citizens is necessary only because the income tax system is based on the disclosure of income and the taxing jurisdiction imposes income tax on its citizens world-wide. The United States recently enacted the Foreign Account Compliance Tax Act because it needed the estimated tax revenue as an offset to pay for a major "pork" laden law. The OECD has long promoted such means to enforce income tax compliance. What is becoming increasingly apparent is that FACTA has gone too far and the backlash is being dramatically felt across all sectors of the US economy. Why then is it such a surprise that combining short sighted legislation with an already failing tax policy would result in rapidly accelerating an already declining economy?

The OECD is mandating and leading what seems to be a cavalry charge over the financial and social edge into chaos. Its weapon of choice, the income tax system, is not achieving success for the taxpayers in this battle; rather it is assuring the defeat of individual liberties, the natural desire for privacy, and the freedom to live without the fear of arbitrary governmental retribution. Perhaps George Orwell's classic books 1984 and Animal Farm are not works of fiction but accurate previews of what the world will look like as the policies of the OECD create the future.

If an income tax system is such a failure then what alternatives are there?

For that answer we need only to look to the Constitution. Under the Constitution the federal government was only allowed the limited powers granted to it by The People. Taxes allowed would be indirect taxes like duties and tariffs, as well as consumption taxes.

Why is a consumption tax system better than an income tax system? First and foremost it is truly voluntary. If you do not spend, then you do not pay tax. Money not spent consuming can be saved or invested. Consumption, saving, and investing are the underpinnings. It encourages the formation of private capital and without the accumulation of capital, there is no capitalism.

Here's how a consumption tax works. When you buy a hamburger at a restaurant, peanut butter at a grocery store, or a car at the dealership, then you pay a sales tax on what you bought. The tax rate and concomitantly the tax burden imposed would be equal for all taxpayers. The amount of tax varies only because the price paid for goods or services varies.

It is also very efficient unlike the maximum inefficiencies an income tax system provides. That is because the seller, the consumer, and the government are working on a cash basis. The problem of income tax starts from the fact that the term ’income’ has never been defined. As a result the tax code complexity is made necessary because every form of ’income’ needs to be separately described in addition to deductions and credits. In the US system there are, for example, five different kinds of interest income. It is possible that a partnership with five partners that earns interest may result in each of the partners classifying for tax purposes the reported interest differently.

With a consumption tax there are no tax returns required to pay the tax. There are only three numbers, the cost, the sales tax, and the total to be paid. There is no need for tax accountants, lawyers, advisors, return preparers, or a tax ombudsman and no tax audits. There is no need for cross border exchange of information, obtaining an advanced pricing agreement, having foreign financial institutions be subject to civil and criminal liability to the US Treasury. Nobody cares if anyone has a foreign bank account. Basically, every income tax system initiative promoted by the OECD would not be needed. For all the good the OECD has done in tax policy, the OECD would not be needed.

You, no doubt, are wondering why the OECD would ignore the actual and negative impact of an income tax system on economic, welfare, and the social fabric of society. I can present two reasons for you to think about. First, the tax policy makers at the OECD believe that the primary purpose of income tax is to redistribute wealth. As the OECD says, it is trying to create a "fair" tax system. Fair is very hard to figure out but easy to manipulate. Equal, however, is easy to determine but hard to manipulate.

Equal, has an ability to be reasonably quantifiable and can be consistently replicated. Fair, on the other hand, is dependent on the the psychology of who is determining what burden is fair to impose on the other guy under varying circumstance and at varying times. What is fair one moment can be unfair the next. An income tax system whose objective is to achieve fair instead of equal will by design always be a failure. The principle involved can be understood by recognising that a goal cannot possibly be attained if the goal posts are a constantly moving target.

What should we conclude? The economic world is, to understate it, a frightening place. None of the OECD policies seem to have had any effect in avoiding this calamity. To the contrary, they have likely exacerbated this result. Social unrest is rising and widespread violent conflict, at least on a local level, may well be inevitable in a great number of places. The economies of former super-powers are crumbling. Uncertainty and turmoil creates fear, in greater or lesser amounts, throughout all levels of society. The reasons for how we got here are so convoluted and complex that any discussions to pin-point the exact cause would be a useless exercise. Whatever the causes, it seems readily apparent that none of the OECD policies were effective in limiting the awful circumstances in which we now find ourselves.

After 61 years of the OECD providing its services in the interests of international cooperation and economic development policies, it is safe to say that there is a lack of demonstratable proof that the OECD policies have actually been a positive factor in the world's affairs. In fact, the contrary seems to be the true. I am quite convinced that the OECD functionaries have proceeded under the fixed ideological beliefs that global social happiness and economic prosperity can only be achieved when individuals subordinate their economic freedom and liberties to the interests of the collective, a utopian view of society. They are wrong. The state of the world proves otherwise. As to the fate of the OECD, it would seem to be an appropriate time to see if the Queen of Hearts is available on short notice.

About the Author

Denis KleinfeldDenis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses.
He is co-author of the two-volume treatise, “Practical International Tax Planning,” published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.